On this week’s episode of The Secure Retirement Podcast, April and I walk through the options for keeping more of your retirement income by paying less taxes—yes, we’re talking tax diversification and the strategies you can employ so your retirement income doesn’t get clobbered by taxes.
As I say, “It’s not what you get, it's what you keep.”
Listen as we break down the three types of retirement investment accounts and walk you through:
Why it’s important not to put all of your retirement “eggs” in one basket—how to diversify using the different types of investments
How to accomplish what you want with your money and leave it behind in a tax efficient manner
How to easily find out which strategies might work for you, how to make them work for you, and when you should be using a different type of strategy
And much more.
Mentioned in this episode:
Phone: 850-562-3000
Transcript
April Schoen: Hello, everyone, and welcome, my name is April Schoen. And I'm going to be sitting here today with John Curry and we're going to be talking about tax diversification in retirement. I know a super exciting topic, but we're gonna try to make this as fun and as interactive as possible. And if you don't have it, go ahead and grab a piece of paper and grab a pen because we're going to be going through a lot of information today. And you may have some questions, you may say, oh, I need to check on this, I need to ask April and John about this. I need to get with my CPA.
So just make sure that you've got a paper and pen handy for any of those questions that come up. And like I said, John's gonna be joining us in just a minute. John is an author we have he's an author of actually three books now. Preparing for Secure Retirement is his first book. His second book they came out earlier this year is The Secure Retirement Method for Members of the Florida Retirement System. And then we also have his new book that just came out, it actually hasn't even been announced yet, which is The Secure Retirement Method, Life Insurance, The Essential Financial Tool That Everyone Loves to Hate. So that is his new book that just came out.
So before we get started into today's presentation, I just want to tell you a little bit about us and who we are. So John and I, we typically work with people who are getting ready to retire. Many of them are members of the Florida Retirement System. And our clients, sometimes they struggle because they've been so busy with their careers with their families that they just haven't had the time that they would like to really devote to understanding the financial aspect of their lives. And they can feel frustrated, they can feel really anxious or stressed, especially as they get closer to retirement. I actually just had a call with a woman earlier this week, she's looking to retire at the end of December. And she said to me, she said April I actually need to stop thinking about retirement because all I'm doing is thinking about it. All I'm doing is looking at the numbers. I'm stressing about it. And I actually need to stop doing that. So I can like focus on my job that I still have to do, which I kind of laugh about that was that was kind of funny. And I said yeah, this is why we need to look at it.
So we can take some of that stress off of your plate so you can focus on these other things. So here's what we feel most of them have they been one of the things most of our clients want to make sure that they're making the right decisions for their future. But they don't know how to get started. And what we do is we help them understand a lot in a short amount of time. So they can make better decisions. So that they can feel confident about what they're doing. And the end result is that they have systems in place, they have confidence that their money is actually working for them, and that they're on track to reach their goals. So for example, earlier this year, John and I met with a couple that are getting ready to retire. And had they, really always done everything themselves as when they were working.
They did all of their investments, and they did everything themselves. But what they said to us, I thought was important that they came to us because they want to make sure as they're stepping into this next phase, they wanted a second pair of eyes on their plan to make sure that they're making the right decision. And then we were really able to help them in just one or two meetings, help them make sure that they had a system in place had a plan in place. They had strategies, strategies in the works to help them to help them get there. And they have a confidence to know that everything was going to be okay, and that they could actually enjoy this next phase of their life, which I think is so important.
John: Absolutely. And the problem with it April, is most people don't give a whole lot of thought to what retirement will look like until they're real close to retirement. But one of the things that we're able to do is get people to start having a vision of that retirement and pretend they're enjoying some of that now along the way. And sometimes we even encourage people, why don't you take a little time off and act like you're retired to see how it feels. That's right. That's right. I've had to do some of that myself.
April: You have. I'm sure you're going to share some of that with us today too. So here's what we're going to talk about today. We're going to talk about tax diversification in retirement. Let me just first of all say that is a mouthful to say. So what does that really mean? Tax diversification in retirement means that you can maintain your current retirement savings and have this income in the future, all while paying less taxes. And that's what we're going to talk about today. How do you have your current retirement savings, and you can pay less taxes, definitely in retirement, but also along the way.
So we want to make sure that we talk about that. Because what's the real problem here? The real issue is what are tax rates going to be in the future? So if we were in a live seminar, we were all sitting together in the same room together, I would ask you that question. How do you feel about the current tax rates? What do you think is going to happen to tax rates, let's say, five years from now? 10, 15, 20 years from now? Okay, especially with the current climate that we're in.
John: I can tell you having been in this business for 47 years, since 1975, I have seen a lot of tax changes. And right now, Congress is battling over spending bills right now. And the budget cap. So what's happening? You got a lot of people jockeying for position, arguing about taxes, taxes are too low, taxes are too high. And the bottom line is, you don't really know what your taxes are going to be 5, 10, 15, 20 years from now. So you have to have strategies in place, April that will allow you to deal with whatever comes your down to your path? Absolutely. Because I've seen tax changes when I came in business tax rates were 50%. And then the dropped as low as 28%. And now they're back up. And people were talking about 37. You're talking about going back to 39.6? Maybe even going back to 50%.
April: Right. Right. Well, actually John, in a minute. It's a good point, and then I'm gonna pull up. We want to put this chart that is going to show tax history, have you share some of your experience that you've seen over the last 47 years of being in this business, and talk about the tax changes.
John: Very good. Be glad to do it.
April: There is one other thing that they need to be thinking about, too. And that is, what is their income going to be in retirement? Because tax rates are one thing and let's be honest, there is some uncertainty with what tax rates are going to look like in the future. But we saw that we can have more clarity around is what's the income going to look like?
John: Well, what type of income? So income is not just income folks. You've got taxable income, you've got non taxable income. We'll get into that more. April will be covering that. But just just a little thing to make you think for a minute. What type of income do you really want in retirement? Not just how much? What type of income?
April: Yes, and I say this, I always hear this, I still hear this, which sometimes surprises me is that people think they're going to be in a lower tax bracket in retirement. They think they're gonna have, they're gonna pay less taxes. But we don't really find that to be true. And I'm sure John you, countless stories, I'm sure you could tell of people in the last 47 years that it's been the opposite, actually.
John: We'll get into some of the tax history. I'll share some.
April: Which I think is interesting, too, is I'll actually ask the question, well is that what you want? Do you want to have less income in retirement? Because no one comes in and says, you know what, April, my goal is to have less income in retirement.
John: I'm gonna say it another way. I've had people say to me so many times, hundreds of times, my goal is to be in a lower tax bracket when I retire. I said my goal was to have you in the highest tax bracket. They say what do you mean? I say that means we've taken advantage of every legal way to avoid taxes, and you're making so much money, so much cash flow coming in, that you have to pay top tax rate. That would be a terrible problem to have, would it?
April: Terrible problem to have. So John, let's go, I'm gonna pull up this tax history chart. And have you share, share with us about tax history and what you've learned. Not just through your career, but also through your education as well.
John: Okay. How much time would you like me to devote to this?
April: As much time as you'd like. I think this is so important that we take time to go through this because they've got to understand where we've been and where we're going.
John: Well, let's far at the very beginning. When I was working on my master's degree in financial services, April we had an entire course. Not not just a class, we had an entire coursework on the history of income tax, and what you have the cursor on right now is 1913. With the passage of the 16th amendment, we had income tax. And it was really the first time we had the type of tax we have now because the Supreme Court had shut down and basically ruled that income taxes were unconstitutional along the way. But as a whole lot of, I'm a geek about this, there's a lot of stuff I could share. And sometime we should do that just have one, one webinar just on tax history as well.
April: Absolutely.
John: There's a lot of stuff there. But you can see that the top bracket in 1913 was 7%. Minimum was 1%. Went to 7. Now if you go back and look at some of the headlines when this was done. Headlines said temporary tax, and it was temporary. Congress did not lie. It was temporary, because what happened the very next bracket in year four it jumped from top bracket of seven to 15, more than doubled in one year. So they didn't lie, it was temporary. Then look at the next year, what happened then? They raised the top bracket in 1917 67%. Now you had to make a lot of money then. Half a million dollars, half a million dollars back then is huge compared to today. Half a million dollars still a big number today. But the point is that Congress has the power to go in and change those tax rates. And they do. And we've experienced that.
And then go over to the Great Depression years here. And we'll look at what happened here. The tax top bracket here was 25%. Because what happened? There was no no money flowing in the economy. So Congress had to control the tax levers again and said whoops, we got to do something here. And President Roosevelt was like, okay, what do we do in the 30s, especially with social security coming in. So something had to be done. So they had to drop the tax rates to get people to what? Hopefully to get them employed, but also getting money circulating. And then after the Great Depression, look what happened. As soon as we got out of the depression, and by the way, some people even criticize the Roosevelt administration for dragging a depression out for 10 years, a decade, when they usually only last for a few months or a year.
Okay, like the great recession in 2008. But then look what happened 63%. So you go to 25%. So just about time you think, okay, we got tax rates low, 63%. People said this can't be true. This is from the US Treasury Department, IRS record in 2021. This is not something folks that we made up. You can go to the IRS website and get this. And then let's show them the top bracket because I could talk about this all day long. 94%. 94%. And this is where you hear stories about Ronald Reagan, if you read his story, he was doing a movie or asked to do a movie and he actually refused at one point, he said, why would I do that? I'm going to lose 94% of that income. And he tells a story about how he got a million dollar signing bonus, he had to pay 90% taxes? And he said no way.
That's when you started slowing down, not acting as much. But then you take a look how high the rates were. So how close to 94% for all those years. Yeah, it's crazy. Over 90% for what, 10 years, 12 years, then he came down. And then you'll see the next level was a 70%. It stayed at 70% for quite a while. Now, this is information that most people are shocked to hear. He was a democratic president, who set the ball in motion to drop it from 70 to 50%. And that was President Kennedy, John F. Kennedy. So way back before he was assassinated, he put into place procedures in Congress to where the tax rates ultimately went down to 50%. Long after he passed. Then, when Ronald Reagan was elected, he pushed Congress very hard to where ultimately you saw the tax rates were 28%, top bracket. And the economy did very well.
And then George Bush, number one running for president says, read my lips, no new taxes. And what happened. That's when you see the little jump up. The next year actually go back one 31%. So it went from 25%, excuse me 28% or 31. And then after that, it went up to that 39.6. And then we see the little drop 35%, and then go back and you'll see today we're at 37. Back up and down. So what does this tell you? It tells us, tells me after studying this so much over the years, that it doesn't matter what the tax rates are today. Because when you're ready to retire, takes income out or take money out of retirement account it's going to be taxed. And if we don't think about taxes all the way and understand that it's like a see saw the tax rates go up and down. We've got to plan for that.
We've got to have strategies in place so that no matter what the tax rates are that we don't get clobbered. And if you are sitting there saying yeah, but that's only important to the wealthy. Like like some of the politicians are saying. No, that's not accurate. Because look at the dark green on this, on this chart. Every time there was a tax increase, it helped the lower marginal tax rate go up also. So there is an expression that a flooding tide, excuse me, a high tide will flood all boats. So we just need to understand something. This is tax history from 1913 to 2021. And a lot of the things that were in place in the 80s to help you reduce taxes were taken away. In 1986, Congress with a new tax law, they took away tax deductions that have been allowed for years.
And they do them retro actively for the first time in our tax history. They just said nope, can't do this anymore. Period. And that was regarding real estate, oil and gas investments that everyday people were using, and they were taken away. Also, one time before this happened, you could deduct the interest on your credit cards, your car loans, department store accounts, all that interest was deductible. It was taken away. Phased it out over four years.
April: And just like with the Secure Act that was passed in 2019, a lot of people were praising the Secure Act because it increased your age for required minimum distributions from 70.5 to 72. Yay, there's an extra 18 months I can delay taking money out of retirement accounts if I need to. But what did it also do? It had sweeping changes for beneficiaries, who were going to inherit, eventually inherit retirement money from especially like their parents or things like that. Major changes in the tax code.
John: And I know that's not the topic today. But that has to be taken into account because it's not just taxes you're going to pay at retirement. It's what are you, what will you leave behind? And how much of a tax burden will there be on those accounts when you die? So I mean this, I love this. I'm a geek about this, as you know, but I'm telling you, this is something that very few people pay attention to. Even CPAs and attorneys. We will find sometimes CPAs will say you know what? I never thought of that. I just tell people to maximize their retirement accounts. Because when they retire they'll be in a lower tax bracket, and that's not true. No, it's not true. If they're doing everything properly, maximizing retirement accounts, and have social security, have a pension, I almost guarantee you they will not be in a lower tax bracket.
April: Right. Absolutely. Thank you, John, for sharing that. I think it's very important context. Because if anyone if anyone on the call today, or you're hearing this later, if you were on the webinar we had a couple of weeks ago with Ed Slott, one of the things that he talked about is that most likely you're in the lowest tax rates that we're going to be in for quite some time.
John: I'd be willing to say this. If Congress does what is anticipated, I'd be willing to bet you we're in the lowest tax bracket, then we'll see for 10 years. And I hope, I hope that they don't get all the changes in their tax rates that they're talking about. Because it's not just tax rate increase, as you pointed out, that add all these other things to it.
April: Okay, so one of the things that we're going to talk about too, a little bit later on, we're going to get into an actual look at a case study. So we're gonna look at a case study and say, hey, if you do option A, or you do option B, which is going to give you that better outcome, and what does that mean? That means which one's going to give you higher after tax income? Because you're going to see, we're going to look at this case study of saying, okay, it's fine if you have. Or we're going to look at the case to see having the same gross income, you know, person A and person B, they're taking the same amount of money out, that's gross, but it's not what you get. It's what you keep. And that was one of the other things that Ed Slott said, too, it's not how much income you get. It's all how much do you get to keep? Okay, so we're talking about having a higher after tax income.
This also is going to give you some flexibility, about when and how to take income, because you're not going to have as much government control about oh you can't take it till after 59.5. But you gotta start taking it at 72. And here are these tax rates and here these penalties. So we're going to talk about how do we limit some of that as well. And then also looking at tax efficient options for beneficiaries. Now, you may be saying, April, I don't really care so much about tax efficient options for my beneficiaries. Like they're going to get what they did, and they can deal with it. It's more about me, and it's more about my planning. And that is true.
So my thing here would be though, this is not an or question. This isn't a how do I structure, I'm gonna have to take something away from my retirement just so my beneficiaries have a better result. It's not an or, it's an and question. How do we do both? How do you have the income that you want and need in retirement, to have the lifestyle that you want, and it's tax efficient for your beneficiaries.
John: Yeah, but on the other hand, people have the right, if they want to, to let the money go to the government. Congress spend it, anyway they want, or they can let it go to the families. So I crack at it, when I hear someone say I don't care about the kids or the grandkids. I don't care about taxes. Okay, good. So you're going to give it to the Internal Revenue Service, they're going to give it to Congress to spend the hell out of, instead of giving it to your own family. They look at me like, oh my god, I feel like a dummy. I don't want you to feel like a dummy, I just want you to understand that is what gets people in trouble is they're not willing to express themselves, and then get you information to help them. They're not willing to get coaching.
April: Unintended consequences, right? Unintended consequences. So we're going to talk about the different types of retirement investment accounts. We're going to break them into three categories. Tax deferred, taxable and tax favored. Talk about different tax planning strategies, and then also how to use Roth IRAs and permanent life insurance in your tax planning. So we're going to talk about all these different strategies. And we're going to talk about how in a lot of the specific strategies you can implement as well. So one of the things I want to point out here is it's incredibly important that you don't just do these strategies without seeking professional advice.
You know, the whole, like, hey, we're professionals don't do this at home. That's kind of what we're talking about here. Because we don't want you to make a big mistake. We're going to walk through some of that. So one of things I would suggest is that you schedule a time for a strategy session with me or with John. And on the strategy session, we're going to help you get clear about what opportunities are available to you. What's holding you back. What roadblocks are in your way? And what specific steps do you need to take, so that you can save time, money and help you reach your goals faster?
John: What is the cost for that strategy session?
April: This strategy for those on the webinar, we are not charging for the strategy session. So no cost. So thank you for pointing that out. Yep. Free strategy session.
John: Complimentary.
April: Complimentary. That's right. Okay, this is the part of the program where I have to give you important disclosures. Okay, so it goes back to what I just said about not doing this on your own. Seek professional advice, okay. So you really want to seek and you want to look and talk to a tax professional, legal professional, regarding your own financial situation. Let's get into these different types of accounts. So as we mentioned, we're not really sure what tax rates will be in the future. But we do know there's always going to be taxes, right. So this is the reason that we're very big believers in tax diversification. Because when you use a wide range of different accounts, types of accounts for retirement planning, you may be able to pay less income taxes, when you begin to withdraw money from those accounts. Which means you're going to have more disposable income for you and for your family. And we're going to break these down into the tax deferred, taxable and tax favored. So the first one we're going to talk about is tax deferred accounts.
Now this is what we find to be is the most common approach to retirement planning. And this is using things like a 401k a 403b, or a 457. Now with these accounts, you put money in today pre tax, it's going to grow tax deferred, but when you go to take money out in the future, it's all taxable at your highest marginal rate. Okay, say that again. It's all going to, any any every dollar that comes out of these accounts comes back to you, it's 100% taxable at your highest marginal rate, very important there. Now there are some tax deferred accounts that you can use after tax dollars with. So this means you pay the tax today, you put the money in the account, it's going to grow tax deferred, but when you go to take money on the future, the gains are coming come back to you as taxable. These examples of these types of accounts would be a non deductible, traditional IRA and a non qualified annuity.
Another type of category is a taxable account, or we call them tax as you go. These are accounts that you contribute with after tax dollars. So I'm going to pay that tax today, I'm going to have it go into some sort of savings or investment plan. But as it's growing, I may have to pay tax. So these are the types of accounts that you'll get a 1099 at the end of the year, and you may have to pay tax on interest, on dividends and capital gains distributions that happened within the year. Okay, so some examples. What are these, right? So these are money markets, CDs, mutual funds, stock portfolios, bonds, and even real estate rentals as well. Now, we're going to spend most of our time today talking about tax favored accounts. We also call these tax free and these are accounts where you make contributions today with after tax dollars.
So let's be honest, there's really no there's very few things in this world that are truly tax free. Okay. You can, so in the situation these types of accounts you pay the tax today, but here's the difference. It's going to grow tax free. So you don't pay any tax while it's growing. And when you go to take income out in the future, it also comes back to you tax free. Here are some examples of these tax favored accounts. Municipal bonds, Roth IRAs, 529 plans, and then cash value life insurance when it's structured properly. So we're mostly going to be spending our time today talking about Roth IRAs, and then the permanent life insurance today.
John: I have a question before you go further on that. If you are a farmer, I'm holding in my hand, what?
April: Some corn kernels.
John: That's right. A jar full of them. So if you're a farmer, and you're planting corn, given the choice, would you rather pay income tax on the cost of the seed corn that you're going to plant in the ground, or wait until the harvest and pay tax on the harvest?
April: I would rather pay tax on the seed.
John: But your crop may fail. So you may not have a crop. So you pay tax up front. On the other hand, you may have a bountiful crop. So what we have been conditioned by institutions, and the government is oh, we're not going to make you pay tax on the seed today. You can just pay tax later. And when later comes, if you're successful, and your accounts did what you wanted them to do, guess what? They get more tax. So they're not helping you save taxes. They're planning for their long term future at your expense.
April: That's right. And that's what we're going to talk about today. The difference between doing both of those things, right. Very, very important.
John: And full disclosure, I have regular retirement accounts. I have Roth's and I have life insurance. So I'm not saying one is better than the other because they're all important. So I'm not implying that. But it's important to go back to what you said earlier, April. You gotta find out number one, if a strategy fits for someone that's on this webinar today, and if so, to what degree and then how do they do it?
April: Absolutely. And that's a great point John, I think I think this is really good. We're going to go into this next section, and we're going to talk about when should you be using these different types of strategies, okay. So when you're choosing these different accounts, right, so the accounts you choose for your retirement income will depend on where you think that your tax rate will be in the future when you retire. So if you think that your tax rate in return will be higher than it is today, then you should put more of your money in those tax favored accounts like Roth IRAs, life, the permanent life insurance. This way that you are paying tax on your money today. And then you get to enjoy tax free income in retirement.
Okay, so that's if you think I really, two things. You think that tax rates will be higher in the future, your income is going to be higher in the future, kind of those two things together. Are you going to have higher taxes in the future? If that's the case, you need to be focusing more on tax favored accounts. But the opposite is also true. If you think that on the other hand, if you think that your tax rate is going to be lower in retirement, then you should be looking at tax favored accounts. Excuse me tax deferred accounts, like a 401k a 403b 457. Because for these people, they're willing to take that chance. You just said that earlier about, well, what if it fails, right? But it's, they're willing to take the chance that their tax rate in retirement will be lower than it is today.
So they use these accounts to take advantage of a current tax deductions that they offer. But again, remember, they're going to grow tax deferred, that every dollar that comes out is going to be taxable. And this is where it really comes down to your individual situation. So I was think about this this morning, John, is that this week, having different conversations, because pretty much every day that we work, we're having conversations with people who are getting ready to retire. And I had one woman who talking to her, it actually makes sense for her to put money in tax deferred vehicles. She was actually doing the opposite. She said, oh, well my coworker told me, I should just do the Roth. And I said, well, I don't think your coworker fully understands the full scope of what it's going to look like for you in the future.
John: But it also points out, people mean well, giving advice. But it goes back to where you were kidding around about. We're professionals. We'll try this at home. People who hear something on some talking head on television or a well meaning friend at work, or they read an article, and they go off and they do that plan, and they discover later they've got a problem. It comes down to personalization. What applies to you, and when you peel all the layers of the onion back, most the time people are getting advice. The person giving the advice they haven't taken the time to even learn what the person asked. That's not our approach. Our approach is we look at everything if we're going to work together, and then we're able to say, okay, instead of piecemeal, you have a plan now.
April: Absolutely. Because, again, same week. So that was early in the week. And then I also had a conversation, I think it was Tuesday with someone who's maxing out, they're putting as much as they can into their deferred comp. And I said, have you looked at to see if that makes sense? And she said, not really. And I said, okay. I said, well, I think we need to look at this, because we may find that you're actually doing some reverse tax planning. And I can see she kind of thought about that for a second. I said that means you're deferring tax, you're paying at a lower rate, you're deferring a lower tax rate today, to pay higher taxes in the future. And you can see how I rule. I was like, yeah, that's not necessarily what we want.
John: Well, that's why a retirement rehearsal is so important. See, you can look forward, and say okay, if you keep doing what you're doing, or you do what you say you want to accomplish. This is what it looks like. How do you like it?
April: Absolutely. Looking at both, right. So when most people think of planning for retirement, they think of that, really, traditionally speaking, they think of having a 401k. They think of having a 403b or 457. But there are a lot of alternatives for retirement savings. You could have CDs, mutual funds, stock portfolios, municipal bonds, IRAs, Roth IRAs, and there's a couple of strategies that we find that they're either overlooked, or they're not utilized to their fullest capabilities. And that's what we're going to talk about today. And that's going to be the Roth IRA, and then also using permanent life insurance. So we're going to go spend some time, I think it's very important to spend some time, we're going to talk about those two strategies, how they work and how you can use them.
But before we get into that, I want to do this case study we talked about, in looking at really the impact of tax. So we're going to look at two scenarios. We're going to look at, do you take income from a pre tax vehicle like a 401k? Or what does it look like if we have some diversification. Because if you remember we talked about earlier, tax diversification means that your money is mixed throughout multiple categories of accounts. And that allows you to have some flexibility, and allows you to have some choices when determining how you'll be taxed during retirement. So here's an example of how this might play out. So let's say that you take $100,000 out of a 401k. Okay, so this is all pre tax money. And so you're taking out your 401k. And now we're assuming you're gonna do this after 59 and a half, so you don't have any penalties from the IRS.
And let's say you're in a 32% tax bracket. If you are, then you've got to pay 32% of that withdrawal in taxes. So $32,000 goes to taxes, and you have a net withdrawal, a net income of $68,000. Okay, or let's look at option B. So let's say option B is you're going to take half of the income from your 401k. And you're going to take the other half from a tax favored asset, like whole life cash values, or a Roth IRA. So what happens then? So now when you take this withdrawal, you actually end up paying $16,000 less in taxes, you only have to pay taxes on the withdrawal from the 401k. The rest of it comes back to you tax free. So now you have a income, a net income of 84,000.
John: Pretty nice increase.
April: Pretty nice increase, definitely. So again, it's not what you get, it's how much of it do you keep. So that's why this is so important. So let's get into and talk about first Roth IRAs. So what is a Roth IRA? A Roth IRA is an investment account that you contribute to today with after tax dollars. The gains are not taxed while it's growing. So you put money in today that's already been taxed, it's gonna grow tax free, and then when the income comes back to you in the future, it's going to come back as tax free as well. Now, there are some caveats to making sure that Roth IRAs are structured properly.
So we're going to talk about that a little bit as well. One of the things that we've, a couple things we like about Roths. One, there's a wide range of investment vehicles. I mean, almost any type of investment that you can imagine can be used inside of a Roth IRA, because we get that question. Well what kind of investment is this? Well the Roth is really just how the account is categorized, and how it's viewed really by the IRS. What you have inside of it is going to be up to you. So you've got a wide range of options on the investment side. There are no required minimum distributions on a Roth IRA.
Now, we don't have enough time today to really go into the required minimum distributions. That also could be a webinar all on its own. But if you don't know what a required minimum distribution is, it's a rule by the IRS that says you have to start taking money out of your pre tax retirement accounts when you're 72. whether you want it or don't want it. Whether you need it or don't need it, you have to start taking that money out or you're actually penalized. It's a pretty, pretty big penalty from the IRS.
John: Again, we don't have time to cover that in detail. But there is a situation that when even a Roth is subject to required minimum distribution. And it goes back again, to what you said earlier about leaving money to your family, and avoiding taxes, or at least reducing the tax burden. But a family member, let's say, I want to leave my Roth to my son and daughter. They gotta take distributions on it. RMDs. So there's a whole lot of stuff behind the scenes that's moving around, that people don't hear about. They don't hear that. They just oh, I don't have to do an RMD. No, you don't, but if you're gonna, you're gonna die someday. And when you leave the money behind, if there's a lot of money there, now what happens?
April: And again, this is gonna get, we're gonna get into the weeds, but there's RMDs on Roth 401k. So it's not, like, let me just be honest, this stuff is not easy, folks. It is complicated. And there are layers and layers and layers to this, okay. So you've got to make sure that you're working with somebody who knows what they're talking about.
John: You just made a, I got a big chuckle out of that, because I know what's required for us to maintain our licenses of continuing education. Plus what we both do over and above that. There are more letters after my name than in my name because of learning and studying over the years. This stuff is very complicated. And these people in Congress change the damn rules all the time. So what once you learn it, and you know it, now you got to go relearn, right?
April: So Roth IRAs are tax free to beneficiaries. So John was mentioning that. So again, it's what we talked about earlier, right? It's not an or question. It's not a, do I have something or do I leave it behind? It's an and question. How do we accomplish what you want, and leave it behind in a tax efficient manner? So how do you get a Roth IRA? And we get this question a lot. How do I even start one? Well, you've got some options. You can contribute to a Roth IRA. Now a couple key points here, only earned income can be contributed to a Roth IRA. So you've got to have earned income. There are also income limits.
So if you, there's a chart, we have to follow if you file single, or joint. And if you make too much money, you can't contribute to a Roth. And they're also contribution limits, you can only contribute a certain amount per year. So you got to pay attention to those. You may have a Roth retirement account available through your employer. So you could have a Roth 401k, for example, you could have a Roth 403b, for example. Okay, so that's another option. And you can also convert pre tax retirement accounts to a Roth IRA. Okay, so that's what we're going to talk about next is converting retirement accounts to a Roth.
John: Why would I do that? Because now I've got a pay tax. Why in the world would I even think about doing that?
April: Doing the conversion?
John: Yes.
April: Yes. Let's talk about that. Why would you do it? So let's talk about what it is first, and then how it works? And why would you do it? It's a great question.
John: I did it.
April: So with a Roth IRA conversion, what you're going to do is you're going to convert pre tax retirement accounts to a Roth IRA. What does that mean? That means you have a traditional IRA, you have money in a 401k, a 403b, or 457. And you're now going to convert that amount to a Roth IRA. What does that mean? That means that the amount that you convert is actually considered taxable income for that year. So let's say let's just keep the math easy.
Let's say you converted $100,000, this year. Well that $100,000 gets added on top of your current income, and you have to pay tax on that amount that you convert. So we're gonna talk about that. So you gotta, so it's all gonna be considered taxable income and you got to pay tax on that. So there's a couple things you want to think of. One is, how will you pay the tax? Will you pay it from the account? So I've got this $100,000. Do I have the $100,000 pay the tax? Or do I pay it from another source?
John: You're making it sound like going to get a mortgage. Don't worry about it. There's no upfront cost at all. We'll just let, we'll just add that to your loan and charge you interest for the next 30 years.
April: Oh, that doesn't sound good.
John: Instead of just paying my expenses upfront.
April: Right? Right. Exactly. That's exactly what we want to do. Right? So we're paying it today. We rip that band aid off. Okay. Because again, think back when we said earlier, think back when we looked at that, that chart. I don't know about you, but we're in historically low tax rates today. Okay, this is why we have to look at this. We are having more conversations, people are asking us more about Roth conversions today than at any time in my career. It's because we all feel it. We feel like taxes are going to go up in the future. Right?
So here's what you want to look at. You want to look at how will you pay the tax? Is it from the account? Or is it from another source? This is another question you want to ask. When will you need to take income from this account, and how much? And then how will it be invested? So those are some some key considerations to think about with a Roth. But to answer your question, John, and I kind of did answer it in a roundabout way. You said, why would I do that? Well, the short answer is, is that you go ahead and pay the, you rip the band aid off, you pay the tax today, so that now you have this money in this account, it's going to grow tax free, and you can take income out tax free.
John: Let me tell you why I did it. I decided that the money that's in my Roth account, it's not likely that I'll ever need that money. So I wanted to leave that behind tax free. But if I want the income later, if the account does what I want it to do, that is grow, and do well. And if I change my mind because of inflation, or because I'm having to pay more money in taxes on other accounts that I can take money out if I need it for me, but I don't think I'll need it for me. So I'm trying to plan ahead long term, 15, 20, 30 years into the future. I'm 68. I'll be 69 in December. So people will say why you planning that long. Well, first of all, I may live to be 100 years old.
April: That's right.
John: And if I do, I can pretty much guarantee I'll be wanting more income along the way, or at least chunks of money to go do things. So people go, oh, you're right. And if I don't need the money, instead of the government getting it all in taxes, that's where the Roth and ultimately insurance comes into play. In my case, I was willing to bite the bullet, pay the tax, as you say, rip the band aid off and pay the tax. I didn't like paying the tax, but I also know I'm not likely to be in the same tax bracket 5, 10 years down the road.
April: It also, and this is kind of some psychology behind it. But now that Roth, if you do want to take something out of it, it's almost guilt free. Because you don't have this added thing of oh, but I have to pay this tax. Because how many times do we see people that have money in retirement accounts, and they need the income or they want the income? And they don't take it out because they don't want to pay the tax?
John: We see it all the time.
April: All the time.
John: I've seen it so many times in my 47 years in this business, where they said, well, that's my just in case money, just in case. So what you're gonna do, all the plans you had to take vacations, you're not doing them, you're going to die, leave all this money behind, and relatives are going to take your money and go on the trips you never took.
April: That's right. So there is a better way. So let's talk about how Roth are taxed for a second. And then we'll get into some other strategies as well. So there's something with a Roth IRA, that's called the five year rule. I'm going to talk about this conception. But again, this is where Roth can also get complicated, and just going to be honest with you about it. And this is why you want to make sure that if you do this, if you're working with someone that they know the ins and outs and how things work. Contributions that you put into a Roth are always tax free. So if I'm contributing to a Roth, I can take that back tax free. If I convert my IRA, I can take that back tax free.
So John, for you, the amount that you converted in your IRA, you could turn right around and take that back out, and you don't have to pay any taxes or penalties, etc. On that portion. Okay. But here's where we talked about how this money you put it in and it grows tax free, and you can take it out tax free. So earnings, though inside the Roth may trigger taxes and penalties depending on your age and how long you've had the account. The short answer is, is that if you're over 59 and a half, and you've had the account for at least five tax years, that earnings can be withdrawn tax and penalty free. So this gets a little complicated and we can help you with it about when it's taxed and when it's not taxed. But we just want to make sure that we pay attention to that part as well.
So now let's get into some different, a different strategy which is talking about the life insurance and how it can help you in retirement. So we mentioned earlier life insurance is one of those strategies that's often overlooked for retirement savings. Because couple things. You're probably already familiar with it as the primary purpose which is the life insurance benefit right. Where it protects your family, it protects your business in the event of you passing. Of the the insured passing. And that's what we refer to as the policy's death benefit. But when we look at permanent life insurance, it has other living benefits. Policy owners can actually access the cash value that builds in the policy for different financial reasons. One of those being that you can supplement your retirement income. This is why this can be a very versatile tool that you can use to help families, not only do you have some protection, but you get it can also help enhance the portfolio wealth as well.
So life insurance as seen as a societal good, and therefore it has these very favorable tax benefits that a lot of other accounts don't have. So the death benefit goes tax free to your beneficiaries. While the cash is growing, it grows tax deferred, you don't have to pay any tax while it's growing. And you can take out the cash values tax free as well, as long as it's structured properly. Similar to the Roth. There's some rules on that. Let's talk about the the parts of the policy itself. And again, these can get complicated.
So it's important that we take the time to really sit down and look at these. But life insurance can offer more benefits than just the tax side. Okay, you can have the protection through the death benefit. We see it as a comprehensive portfolio asset because the cash values as they're growing as they're building, they're considered to be a non correlated asset. What does that mean? It means it's not correlated to the stock market.
John: My cash values, in my life insurance policies that I've had all these years, are my most important financial asset, period. I love what I have in the investment world. But I know that every day those cash values go up. We like to say they never have a bad day, they go up. As long as I'm paying my premiums I get even more. In one policy I have I don't even pay the premiums and the cash value continues to grow. I just want to make a plug because I'm here. In my new book that we just got in literally yesterday. In chapter seven, I talked about a lot of the stuff we're covering here. So if people say, I need to know more about that, or that's not enough detail here, just request the book. We'll send it to them complimentary, and they can learn more about that.
April: I'll send out an email after I just thought about this, I'll send out an email after the webinar. And because I did talk about the book at the very beginning, but I'll remind them that's available and see if if they'd like us to send them a copy. That's a good idea.
John: All you have to do is request it. No obligation. It's our gift to you.
April: Absolutely. I was gonna say too, when you were saying that. The way I view the cash values for me, I'm a little younger than you are John.
John: You're 30 years younger. Smart aleck.
April: But the way, the way I view it is it actually helps me be more efficient in my other investment. It doesn't take away, it actually helps my stock portfolios be more efficient. And we can talk about that.
John: It protects you in a down market so if you need money, you're not taking money out of your investments with a permanent loss. Because once you take it out, it's gone. It can't grow then.
April: That's right. Absolutely. So there are some guarantees in these policies, we don't have the time to really get into all that today. There is, can be dividends as well that help grow the cash and help grow the death benefit. You can again, we mentioned this before, but you can take out the cash value without penalty. So there's no IRS penalty. There's no like 10% penalty for early withdrawals and anything like that. There's no required minimum distributions. And there's creditor protection, especially in the state of Florida. This is not in all states, but definitely the state of Florida. And you can also add on other benefits too, like long term care, which I think is very important.
John: If they qualify for it.
April: If they qualify for it. That's right. So you know, one of the things that we've talked about today is just using these different investments for tax diversification.
John: I want to say something.
April: Yes.
John: I'm 68 years old. Some of the stuff that you're talking about, like long term care riders. People in their 30s and 40s. People in their 20s even should be investigating that. Because when you're 68 years old, now it's too late. But it's not too late. It's just more expensive. But if people your age and younger, would take a look at getting a big chunk of good old fashioned whole life insurance with those long term care rider benefits on there, that means a huge world of difference in their retirement. So I would say everybody listening to this, no matter how old you are, investigate it. But at the same time, if you have adult children and grandchildren, one of the best things you can do is either help them acquire that, or at least educate them. Give them the book because they cover it, and then they'll learn more about it.
April: Well, and I'm a long term care, you know, we may find that in the future that people required to have it, because they actually just passed this law in Washington State, it goes into effect January 1, where you have to have your own long term care policy, or you're going to get charged a higher payroll tax, a higher payroll tax. They're basically kind of creating their own program, socially funded program, for long term care.
John: So I did not know that. So I'm in the business, I think I'm a pretty smart guy. But that's, that's one I did not know. But that's also the benefit of us working in some many states, too, because we have clients all across the country.
April: Absolutely. So we have to be on the lookout for those things that can filter down to other states as well. That's right. So really, let's just kind of sum up what we've talked about today. So we really talked about having different investments so that you can have tax diversification. And that just means that you can have more income in retirement because you're paying less taxes. So if you think back to that case study, we looked at same gross income, but much higher, higher after tax income, because we're paying less in taxes along the way. So today, we talked about two main strategies to have more tax free income in retirement. And that's utilizing Roth IRAs and permanent life insurance. But here comes the hard part. How do you know which one is right for you? That's the million dollar question.
So everyone on this webinar, you guys have choices, right? There's some choices for you, you can do nothing with the information that you got today. You can try to figure it out on your own, or you can work with someone and a team that can help you. Absolutely. So one of the things that we would recommend is that we schedule a time for a strategy session. Because here's the thing. Today we talked about these specific strategies. And these are all strategies that you, anyone on this call can implement, right? But the question is, is it right for you and your situation, and which one is better? Okay. And I'll say it again, it's incredibly important that you just don't make these decisions haphazardly. And you just do them without seeking some kind of professional advice. You don't want to make a mistake and have a tax issue later on.
So that's why, what we want to do is set up a time for a strategy session. As John mentioned, these are complimentary. For those in the webinar, we're not going to charge a fee for having a strategy session. And here's what we're going to do in this strategy session. We're going to get clarity about your financial goals and concerns. We're going to get clear on what opportunities are available to you specifically, is one of the strategies that we talked about a good option for you. Should you be focusing on pre tax savings? Or should you have some tax diversity? What's holding you back? What are the roadblocks in your way? How do we clear those out? And what specific steps do you need to take so that you can save time, money and you can get the results that you want even faster?
Now, I don't know if we're a right fit for you. I don't. I'll be honest, we are not a right fit for the right fit for everyone. But I can tell you that usually in these strategy sessions, on these strategy sessions are usually like 25-30 minutes. At the end of that strategy session, we'll know. We'll know if it makes sense for us to continue working together in some capacity or not. So who this is who this is for. This is for you to set up a strategy session, if you're motivated. If you're committed to reaching your goals. To me, that means you have this lifestyle in retirement that you want. And you want to make sure you get there. That you're coachable, that you're willing to be open minded and learn and that you're an action taker. I had a woman this week, I needed some information back from her. And we got off the call.
And within like that afternoon, she sent me the documents. And I wrote her back and I said I just want to tell you what, you're an action taker and I love it. You mean we needed this information and you got it back to me right away. That tells me that she's motivated and committed, right? And she wants to really work together to make sure she can she can retire soon. And she wants to go spend lots of time with her grandbabies in Texas. And I said, great, let's figure out how to get you there. But who is this call not for? This call is not for someone if you're not coachable. You're not willing to listen to other ideas. And if you're just expecting some unpaid consulting. Now we don't get that a lot. To be honest with you, it's, we don't, we don't it's rare that we have to turn somebody away. But it does happen. Because like I said, we are, we're not the right fit for everyone.
John: Okay, let's let's expand on that. When we have turned someone away, why has it been?
April: Mostly because they're either not coachable or they're looking, they really want that un, unpaid consulting.
John: And they're argumentative.
April: Argumentative, yeah.
John: I've had people very, very few thankfully in my entire career who would argue with the signpost. They would argue, I will just tell you, I'm more abrupt about it than you are. I'm not going to waste my time, people who just want to fight. We've got too much of that happening in our society nowadays. If you agree with the philosophy, you're likely to move forward. If not, it's okay.
April: Right? Okay, great. I'm gonna drop this into the webinar so that you have the link, because I was gonna talk about the best way to schedule a call. You can call our office 850-562-3000. That's the best way to call in call our office to schedule a time. And you can also either email me or John to set up a time. And you can go to our website. So you can go to our website, which is johnhcurry.com/call, and schedule your 30 minute call. You can also, I just put a link in, and that's for my calendar. So it doesn't matter which, it doesn't matter which one you do. We just try to make it easy for you. Rather make it easier than harder. So if it's easier for you to go to johnhcurry.com/call, or you can also click the link that I just put put in the chat for you to schedule time.
John: I would like to emphasize something. On this call, the strategy call. There is how much pressure? Zero.
April: Zero pressure.
John: Zero pressure, none at all. The purpose is to find out if there's a fit, and if so great, if not it saved everybody time.
April: Absolutely. Good.
John: And I will promise that on the call whether it's with April or me, you will walk away with value because you will have clarity. You will have some questions that you brought up that have been answered for you.
April: Well, I just want to say thank you to everyone on the call. As we went through all this information today, we're going to have some more webinars coming up too. We're going to do one on social security. And then we're also going to talk about some risks in retirement, which one of those risks is taxes. So we're gonna kind of go through some of that on one of our next webinars as well. So thank you guys for joining us today and we hope to talk to you guys all soon.
John: Can I do some more tax explaining on that one?
April: Absolutely.
John: Okay. Thanks, folks.
Voiceover: If you'd like to know more about John Curry's services, you can request a complimentary information package by visiting johnhcurry.com/podcast again that is johnhcurry.com/podcast or you can call his office at 850-562-3000 again that is 850-562-3000. John H Curry chartered life underwriter, chartered financial consultant, accredited estate planner, masters in science and financial services, certified in long term care, registered representative and financial advisor Park Avenue Securities LLC. Securities, products and services and advisory services are offered through Park Avenue securities a registered broker dealer and investment advisor. Park Avenue Securities is a wholly owned subsidiary of Guardian, North Florida Financial Corporation is not an affiliate or subsidiary of Park Avenue securities. Park Avenue Securities is a member of FINRA and SIPC. This material is intended for general public use by providing this material we are not undertaking to provide investment advice or any specific individual or situation or to otherwise act in a fiduciary capacity. Please contact one of our financial professionals for guidance and information specific to your individual situation. All investments contain risk and may lose value. Past performance is not a guarantee of future results. Guardian, its subsidiaries, agents or employees do not provide legal tax or accounting advice. Please consult with your attorney, accountant and/or tax advisor for advice concerning your particular circumstances. Not affiliated with the Florida Retirement System. The Living Balance Sheet and the Living Balance Sheet logo are registered service marks of The Guardian Life Insurance Company of America New York, New York Copyright 2005 to 2020. This podcast is for informational purposes only. Guest speakers and their firms are not affiliated with or endorsed by Park Avenue Securities or Guardian and opinions stated are their own.
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